TMI Blog2011 (10) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... J . Although several questions of law are raised by the revenue in this appeal, counsel for the revenue presses only the last question. The said question (as reframed) reads thus :- "While computing the capital gains arising on transfer of a capital asset acquired by the assessee under a gift, whether the indexed cost of acquisition has to be computed with reference to the year in which the previous owner first held the asset or the year in which the assessee became the owner of the asset ? " The appeal is admitted on the above substantial question of law and taken up for final hearing by consent of both the parties. 2. The assessment year involved herein is AY 2004-05. 3. The relevant facts are that the assessee is an individual who derived income from business, house property, capital gains and other sources. 4. In the assessment year in question, the assessee had declared total income of Rs. 20,92,400/-. The said return of income included long term capital gains arising from the sale of a residential flat bearing No.1202-A ('capital asset' for short) at Chaitanya Towers, Prabhadevi, Mumbai. The said flat was originally purchased by the daughter of the assessee ('pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the assessee. In the present case, admittedly, the capital asset was acquired by the assessee under a gift on 1/2/2003 and, therefore, the first year of holding the capital asset by the assessee is FY 2002-03. Therefore, the indexed cost of acquisition in the present case has to be computed with reference to the cost inflation index for 2002-03. Mr. Chatterjee further submits that the deeming fiction contained in Explanation 1(i)(b) to Section 2(42A) of the Act cannot be applied in determining the indexed cost of acquisition, in view of the specific words used in clause (iii) of the Explanation to Section 48 of the Act, The submission is that the deeming fiction under Explanation 1(i)(b) to Section 2(42A) of the Act to include the period for which the asset was held by the previous owner in the period for which the asset was held by the assessee under a gift or will, is for the limited purpose of determining as to whether the asset was held as a short term capital asset or long term capital asset and that the said fiction cannot be applied in determining the indexed cost of acquisition in view of the express language used in Explanation (iii) to Section 48 of the Act. It is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ft or will, then, such transaction shall not be regarded as transfer and in such a case the liability to pay capital gains tax would not arise. Liability to pay capital gains tax, however, would arise when the assessee transfers the capital asset acquired under a gift or will for valuable consideration. 11. The mode and the manner of computing the capital gains is provided under Section 48 of the Act. As per Section 48, the income chargeable under the head "capital gains" is liable to be computed by deducting from the full value of the consideration received on transfer of the capital asset, the amount of expenditure incurred wholly and exclusively in connection with such transfer and the cost of acquisition of the asset and the cost of any improvement thereto. Where the assessee acquires any capital asset under a gift or will without incurring any cost of acquisition, there would be no capital gains liability. However, Section 49(1)(ii) of the Act provides that in the case of an assessee acquiring an asset under a gift or will, the cost of acquisition of the asset shall be deemed to be the cost for which the previous owner of the property acquired it, as increased by the cost of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1/1993 (though actually held from 1/2/2003) by applying the Explanation 1(i)(b) to Section 2(42A) of the Act and hence liable for long term capital gains tax. However, the revenue disputes the applicability of the deemed date of holding the asset from 29/1/1993 while determining the indexed cost of acquisition under clause (iii) of the Explanation to Section 48 of the Act. 15. For better appreciation of the dispute, we quote the relevant part of Section 48 herein :- "48. Mode of Computation. The income chargeable under the head "capital gains" shall be computed, by deducting from the full value of the consideration received or accruing as a result of the result of the transfer of the capital asset the following amounts, namely:- (i) expenditure incurred wholly and exclusively in connection with such transfer; (ii) the cost of acquisition of the asset and the cost of any improvement thereto; Provided that................. Provided further that where long-term capital gain arises from the transfer of a long-term capital asset, other than capital gain arising to a non-resident from the transfer of shares in, or debentures of, an Indian company referred to in the firs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition has to be determined with reference to the cost inflation index for the first year in which the capital asset was 'held by the assessee'. Since the expression 'held by the assessee' is not defined under Section 48 of the Act, that expression has to be understood as defined under Section 2 of the Act. Explanation 1(i)(b) to Section 2(42A) of the Act provides that in determining the period for which an asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner shall be included. As the previous owner held the capital asset from 29/1/1993, as per Explanation 1(i)(b) to Section 2(42A) of the Act, the assessee is deemed to have held the capital asset from 29/1/1993. By reason of the deemed holding of the asset from 29/1/1993, the assessee is deemed to have held the asset as a long term capital asset. If the long term capital gains liability has to be computed under Section 48 of the Act by treating that the assessee held the capital asset from 29/1/1993, then, naturally in determining the indexed cost of acquisition under Section 48 of the Act, the assessee must be treated to have held the asset from 29/1/1993 and accordingly the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee. In other words, in the absence of any indication in clause (iii) of the Explanation to Section 48 of the Act that the words 'asset was held by the assessee' has to be construed differently, the said words should be construed in accordance with the object of the statute, that is, in the manner set out in Explanation 1(i)(b) to section 2(42A) of the Act. 20. To accept the contention of the revenue that the words used in clause (iii) of the Explanation to Section 48 of the Act has to be read by ignoring the provisions contained in Section 2 of the Act runs counter to the entire scheme of the Act. Section 2 of the Act expressly provides that unless the context otherwise requires, the provisions of the Act have to be construed as provided under Section 2 of the Act. In Section 48 of the Act, the expression 'asset held by the assessee' is not defined and, therefore, in the absence of any intention to the contrary the expression 'asset held by the assessee' in clause (iii) of the Explanation to Section 48 of the Act has to be construed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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